A repo or repurchase Agreement is an instrument of money market. Usually reserve bank (federal bank in U.S) and commercial banks involve in repo transactions but not restricted to these two. Individuals, banks, financial institutes can also participate in repurchase agreement.
Repo is a collateralized lending i.e. the banks which borrow money from Reserve Bank to meet short term needs have to sell securities, usually bonds to Reserve Bank with an agreement to repurchase the same at a predetermined rate and date. In this way for the lender of the cash (usually Reserve Bank) the securities sold by the borrower are the collateral against default risk and for the borrower of cash (usually commercial banks) cash received from the lender is the collateral.
Reserve bank charges some interest rate on the cash borrowed by banks. This rate is usually less than the interest rate on bonds as the borrowing is collateral. This interest rate is called ‘repo rate’. The lender of securities is said to be doing repo whereas the lender of cash is said to be doing ‘reverse repo’.
In a reverse repo Reserve Bank borrows money from banks by lending securities. The interest paid by Reserve Bank in this case is called reverse repo rate.
Borrower of funds is called as seller of repo and lender of funds is called as buyer of repo. When the term of the loan is for one day it is known as an overnight repo and if it is for more than one day it is called a term repo.
The forward clean price of bonds is set at a level which is different from the spot clean price by adjusting the difference between repo rate and coupon earned on the security.
Sathish Emmadi
Sathish Emmadi is a co-founder & editor at Lastbull.com. He is presently working in IT for one of the world’s top mutual fund companies. Handled multiple projects in BFSI (Banking,Financial Services and Insurance) domain. An Engineering Graduate from NITW.
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{ 93 comments… read them below or add one }
please tell me a repo rate, s.l.r, bank rate
Hi Sandeep,
Now the bank rate is 6%, Repo rate is 6.25%, Reverse Repo rate is 5.25% and SLR is 24%, CRR is 6%
repo rate is a rate at which commerial banks borrow money from rbi to fulfil short term goals called repo rate.
bank rate is a rate at which central bank ready to give money to commercial banks.
slr not sure what is?
i want to knew about repo rate reverse repo rate slr crr and plr………plz tell me about all these …and i m so confuse about money inflection, and deflation ….
Hi this is manish. i want to know that what is means of Repo Rate and what is reverse Repo Rate and what is CRR and what is the means of bank rate and means of CRR
Kanchan, Manish
Repo rate is rate at which banks borrow from RBI. Reverse repo is rate at which RBI borrows from banks.
These rates impact the liquidity in the system.
CRR is cash reserve ratio. This is the cash that is kept in RBI by different banks. For example, out of Rs 100 deposit in any bank, Rs 9 should be kept at RBI (if the CRR is 9%).
What is CRR (For Non Bankers) :
CRR means Cash Reserve Ratio. Banks in India are required to hold a certain proportion of their deposits in the form of cash. However, actually Banks don’t hold these as cash with themselves, but deposit such case with Reserve Bank of India (RBI) / currency chests, which is considered as equivlanet to holding cash with themselves.. This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by the RBI and is known as the CRR or Cash Reserve Ratio. Thus, When a bank’s deposits increase by Rs100, and if the cash reserve ratio is 9%, the banks will have to hold additional Rs 9 with RBI and Bank will be able to use only Rs 91 for investments and lending / credit purpose. Therefore, higher the ratio (i.e. CRR), the lower is the amount that banks will be able to use for lending and investment. This power of RBI to reduce the lendable amount by increasing the CRR, makes it an instrument in the hands of a central bank through which it can control the amount that banks lend. Thus, it is a tool used by RBI to control liquidity in the banking system.
What is SLR ? (For Non Bankers) :
SLR stands for Statutory Liquidity Ratio. This term is used by bankers and indicates the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities. Thus, we can say that it is ratio of cash and some other approved to liabilities (deposits) It regulates the credit growth in India.
What are Repo rate and Reverse Repo rate?
Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks. When the repo rate increases borrowing from RBI becomes more expensive. Therefore, we can say that in case, RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate
Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the RBI. The RBI uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the RBI will borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep their money with the RBI.
Good explaination Ankur Singh. You left bank rate. Explain that too will do great. Thanks
@ K.Bala.. Bank Rate is interest rate @ which Central Bank (In India RBI) lends Loans and Advances to commercial banks or FI’s for long term basis .Bank rate is also known as “Discount Rate”
and it is differ from Repo Rate cause Repo Rate is for short term loans by RBI to banks.
Very Good Explanation Ankur..Thanks !
hi this is pavithra, i would like to know about the credit control facilities of RBI. please help me knowing that!
sir now the RBI has hiked its repo rate &reverse repo rate. What would be its immediate effect?
Sir,
Are you tell me in deatils about SLR and CRR.
Hi,..It’s fenil here..I dont understand that …y RBI will borrow money from banks ?
To maintain liquidity in the market. To maintain value of Rupee at a reasonable level.
what is repo
repo means repurchase. when banks need money they borrow from from RBI and pay some rate of interest to RBI. They borrow from RBI for their short term needs.
sir,
plz tell me about SDR and CAR.Spiceal drawing rate and capital adiquacy retio.
Hi Kuldeep,
I will cover CAR. SDR is not related to RBI or any Central bank though.
How much currency a country can print or havr?
Hi Fenil,
Reverse repo is basically to absorb liquidity in the market rather than RBI’s funds requirement. RBI pays interest on the excess short term money (very short term in fact) parked by banks. Hope it clarifies!
Please note that this money parked at RBI by banks is different from CRR requirement. CRR is must for banks whereas reverse repo is voluntary.
Hi Amrit,
As far as my knowledge goes, there is no restriction. Central bank has freedom to print currency. But it prints only in the required amounts. Excess printing will cause loss of value of currency as we have seen hyper-inflation in Zimbabwe in recent times.
Hello
Sir, plz tell me abt SLR if can possible plz tell in easy language
sir, what is stagflation…?
sir plz explain repo rate and reverse repo rate? and current rate is going on…….
Sir, I understand that the new monetary policies( ie increased repo & reverse repo rates) are going to trap the Growth, as they have. But I am not able to follow when Mr. Finance Minister says it will curb the Inflation. Could you please explain the know-how. Thank You!
Hi Vikas,
Current rates are as below.
Repo rate: 7.25%
Reverse repo rate is: 6.25%
Hi Vishwa,
Increasing policy rates is the traditional way of controlling liquidity in the market. When RBI increases base rates, banks increase their interest rates both deposit as well as loans. As a result, there will be less people who take loans and investors are encouraged to deposit their money in banks rather than spending. When there is less spending there will be less inflation.
Regarding growth: When the interest are high, a company which takes loans for a business has to pay more amount of interest, so profits will come down. So there is a less probability of expanding businesses. so less growth rate.
Hope it is clear.
Clean!! thank you Sathish..
Will you please let me know the defination of SHARPE RATIO with some examples
Hi Inder,
Sharpe ratio is used to measure a mutual fund manager’s ability in generating profits considering the risk he has taken. I will cover it in a separate post.
A higher Sharpe ratio is preferable as it denotes higher returns for the risk taken. A negative Sharpe ratio indicates that the fund is performing worse than a riskless asset.
Hi,
Is there any alternative to control inflation other than increasing interest rates?
Next in the list are, Government’s fiscal policy. For example, if government offers more tax benefits on investments, people will invest more than spending.
Currency ex-rates too play a role. For example, In an European country if the bank rates are very less, say 3%. Instead of keeping their money in their country’s banks, they will try to invest in India. This appreciates rupee against that currency. In this case RBI’s stand makes a difference i.e. to manipulate currency market by involving in trading and depreciate rupee intentionally so that exporters won’t be affected adversely or allow the appreciation of rupee.
i would like to know the effect of increase in repo & reverse repo rate & CRR & SLR on the economy & inflation
Hi Aniket,
Repo and reverse repo are discussed in the articles and comments. Please visit the below articles for CRR and SLR
http://lastbull.com/what-is-cash-reserve-ratio-crr/
http://lastbull.com/what-is-statutory-liquidity-ratio-slr/
Mr. Sathish,
Would you say that the RBI policy to increase Repo/reverse-Repo rates was successful in achieving its primary goal to stop further inflation(it was definitely able to stop further growth)?
Would you also agree that it was the best way to stop inflation?
Can we design a way to control inflation without affecting the Growth radical?
Hi Vishwa,
Clearly it is not successful. But there should be an initiative from Government’s side too like eliminating rigging of agriculture product prices etc and take steps to increase supply wherever it is lacking.
Vishwa
Sathish is right. The inflation is more because of the price manioulation and lack of supply.
Moreover, India is trying to reduce inflation by focusing on demand side (like raising policy rates). The issue is on the supply side. India produces enough agriculture produce but it is not reaching to the market. Lot of foodgrains rot in godown and in open.
Hi,
I need some clarifications :
1.Does inflation has any connection with recession,if so what is it..?
2.What are the effects of printing more curreny?
3.How is dollar value related to Indian Rupee.?
Morover, i am interested in knowing about all these businnes related,markets,sensex etc..Could you please suggest a link or site where i can understand,on a beginners perspective.?
Hi Balaji,
You have come to the right website. We have already posted a number of articles on many subjects of stock market for beginners. Either search with a specific key word in the search box provided at the top of the page or click on the categories listed out on the left hand side of the page and go through them.
hi…
i am interested in bank PO job’s will you suggest me some tips to crack test.
As you know the RBI has increased key policy rates by 25 bps. The current rates are as below
Repo rate: 7.5%
Reverse Repo rate: 6.5%
Bank Rate: 6%
Reserve ratios are untouched.
sir what is the meaning of slr ,bank rate ,crr.
Hi Balram,
Please visit the below links
http://lastbull.com/what-is-cash-reserve-ratio-crr/
http://lastbull.com/what-is-statutory-liquidity-ratio-slr/
MR.SATISH ,
what is Repo rate ? what is reverse repo rate? and about SRR ,SLR?
Hi Meena, This article and the links mentioned in the comments cover the topics, Do you have any specific query regarding the content of the article?
DEAR SIR,
KINDLY UPDATE ME REGARDING THE REPO RATE, RRR, PLR, BANK RATES, GDP RATE, AND ETC.
THANKS AND REGARDS
ASHU KUMAR SINGH
T hanks Mr Ankur.you gave me a clear idea abou thes things.But i am little bit confused about SLR .If you will give more information about these then it will be better.this is priliminary idea plz inform related things also.
Hi Sujit,
Have you read the below article on SLR?
http://lastbull.com/what-is-statutory-liquidity-ratio-slr/
hello sir,
please tell me what is repo rate and what is reverse repo rate in the easiest language.
How does RBI circulate money which it prints in INDIA?
Hi Sathish,
I am preparing for SBI PO Exam.Please suggest some good books that I could refer to….keeping in mind that I just have 10 days to do so…
Why repo rate is higher than bank rate, even though lending at the cost of repo is secured loan and no collateral is needed for lending at the rate of bank rate?
hi
sir new repo rate /slr/reverse repo rate /bank rate discresed /increased sent my id please.
thanks.
What is current Repo rate,Reverse repo rate,SLR,CRR,bank rate.
Hi Archana/Kapil,
Current Bank Rate is 6.0%, Reverse repo rate is 6.5% and reporate is 7.5%. CLR is 6% and SLR is 24%
Hi Neeraj,
I feel the language used in the article is for a layman. If you haveany specific doubts, please let me know.
Hi Anurag,
The simple answer is “Through Banks”.
Hi Prameela,
Apologies for the delayed response. I don’t have much idea about bank exams and MBA. I am an engineering graduate by qualification. Out of my own interest, I learned financial concepts.
Hi Anusuya,
It depends on RBI’s perspective of long term and short term loans. Repo rate is for a short term and bank rate is for long term loans. In a developing country, the central bank may want to keep long term rates low to encourage overall economic growth.
hi, i m a buznssman, but i don have any comercial property may i get a limit from any bank.
Hi Rudresh,
I didn’t get your question. Did you mean getting a loan from a bank?
Current bank rate is 6%, repo rate is 8% and reverse repo rate is 7%.
No change to CRR and SLR i.e. CRR is at 6% and SLR is at 24%.
hello Mr. sathish,
i would like to know what is the relation between SLR and CRR? Is SLR include CRR . i mean bank have to deposit some money in form of cash at RBI according to CRR and bank have to also maintain some deposit in form of gold, cash and other securities as per SLR. so the cash deposited in form of CRR includes in SLR or not.
Hi Vinay,
As per my knowledge SLR doesn’t include CRR. In case of CRR the banks have to park some amount of Cash with RBI whereas in case of SLR banks have to maintain some amount of cash and cash equivalents in their own accounts to meet customer withdrawal requests. SLR also ensures banks will not give away more money in loans.
By holding cash equivalents the banks earn some amount. For example, by holding G-Secs, the banks receive interest.
for maximum how many days a bank can borrow money from rbi at repo rate?
Hi Ash,
The maximum repo period is 14 days in India.
You may be interested in repo calculations.
http://lastbull.com/calculations-involved-in-repo-and-reverse-repo/
NIce work. Also visit my blog.
what is current repo rate ,reverse repo rate,bank rate,CRR and SLR?
Hi Shashank,
The current bank rate is 6%, reverse repo rate is 7% and repo rate is 8%.
CRR is 6% and SLR is 24%
sir
please tell me the difference between BANK RATE AND REPO
sir,
what is current inflation rate and its change daily?
what are the mordern way to control inflation not traditional ?
other than slr ,crr, bank rate, repo, reverse repo.
Hi Gaurav,
Quantitative Easing techniques are the unconventional way of controlling economy. These days every one is talking about if Federal bank can apply QE3 to stimulate US economy.
Inflation is not calculated daily. You can keep track of inflation numbers on the below site every month.
http://statisticsofindia.com/tatasoi/
what is m3growth 16.7 ?
and what is wpi 153?
What is repo rate and reverse repo rate and how it affects on inflation control?
CRR- it is also known as CASH RESERVE RATIO, it is the amount of money which the commercial banks has to keep with RBI…
SLR-it is also known as STATUTORY LIQUIDITY RATIO , it is valued in terms of liquid assets of banks which the banks has to keep with RBI.
REPO RATE-it is the rate at which RBI gives loan to commercial banks
REVERSE REPO RATE-it is the rate at which the commercial banks gives loan to RBI.
AT THE TIME OF INFLATION RBI INCREASES THE (CRR,SLR) AND THUS DECREASE THE LOAN GIVING CAPACITY OF COMMERCIAL BANKS IN ORDER TO REDUCE THE MONEY SUPPLY IN THE ECONOMY
AT THE TIME OF DEFLATION RBI DECREASES THE (CRR,SLR) AND THUS INCREASE THE LOAN GIVING CAPACITY OF COMMERCIAL BANKS IN ORDER TO INCREASE MONEY SUPPLY IN THE ECONOMY
hello sir,
I want to know that hike in repo & reverse repo rate affects profitability of commercial banks or not ?If yes then how positively or negatively?
If negatively then what commercial banks can do to maintain profitability even after hike in rates?
If positively then how?
ciao sir,
I want numeric data about the latest monetry policy measurement & the repo rate, reverse repo rate & CRR rate of year 2007 to 2010
awaiting for your reply
Hi Kiran,
Please try searching on RBI site. You may get it in the archives. The info available on any other site may not be accurate.
Hi Satish,
Could you please focus whether repo rate and reverse repo rate will benefited to Co-operative Banks or it adversely affect to compete with nationalized banks.
Sir
What is B.P.L.R.?
THANKS A TON TO SATHISH EMMADI:):):) GOT ALL MY STUFFS CLEARED:):):):):) HAPPY DIWALI TO ONE AND ALL:):):) NOW REPO RATE IS 8.25% AND AGAIN THE REASON BEHIND IT IS TO CURB THE INFLATION:(:( over all no growth
how does govt raise money for investments through open market operation??
Govt buys or sells securities…. Plz c
what is meaning of CRR/reporate/reversreporate?
sir,
my name is sudha, sir please tell me what repo rate , reverse repo rate , crr, and bank rate. please tell me sir
hi satish,
rbi is trying to control inflation by raising different rates. still its no where near to success. can u pls give a logical explanation for the same.
Hi Vivek,
The answer to your question abit complicated, actually there alot many attributes attached to inflation frm mere rising intrest rates. Secondly we also need to remember tat its not gng to bring down inflation rates down overnight its a huge permutation and combination when all works simutaneously and as desired then it will prove the point
The concepts like CRR, SLR and repo rates are a very complicated phenomena when its been overcautiously contained it may even hve a speed breaker effect to the countries GDP
sir,
through your article i got clear on what they are but wasnt able to answer a question i gotin college..
hope you can help me with that..
it goes like..
RBI INFACT INDULGES IN A REVERSE REPO AT THE REPO RATE ANNOUNCED BY IT..
SIR,
can you help me with this question-
rbii infact indulges in a reverse repo at the repo rate announced by it
RBI uses Reverse repo rate for reverse repos.